New York Correspondent
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ANOTHER solid week for US stocks capped a month's worth of strong gains, but with uncertainty and doubt keeping pace with optimism despite the hefty run-up in stocks, even Wall Street's most bullish analysts are bracing for a significant pullback over the next month and into the early fall.
'Concern is still running high over the strength and durability of the economy's recovery once it does break the shackles of the country's worst recession since the Great Depression,' said Joe Battipaglia, equity strategist at Stifel Niclaus. 'The further out we get on this rally, the more those worries build.'
Mary Ann Bartels, technical market research analyst at Bank of America Merrill Lynch has a good news-bad news perspective for investors to digest. She said she still believes that the S&P 500 can reach the target of 1,055-1,065 she set for it back at the end of March in the near term.
But, 'should we hit our targets for the market, it would be a very significant move off of the March lows, and it would also be reasonable then to expect the equity markets to correct', by as much as 30 per cent, she said.
Those kinds of words may be enough to inspire even bullish investors to start taking some of their short-term profits off the table as August gets underway.
'This month is traditionally a slow one. You get low volumes because so many of the top institutional traders go away on vacation, which in a murky climate like this one results in a stock market ruled by the retail traders and marked by a lot of see-saw volatility,' said Ron Pearl, equity strategist at King Asset Management.
After July's steep gains investors are likely to key in on whatever the latest news is. In this last significant week of second quarter earnings reporting season, there will still be plenty of potential market-moving events, highlighted at week's end by the July employment report.
Indeed, the trading action in the last two days of the week showed signs of doubt on investors' part, as the market carried big gains into the last hour of each session only to see those gains reduced by 50 per cent or more by the end of trading.
Friday's session was especially worrisome for the bullish side. as stocks finished barely better than flat despite a report showing that gross domestic product fell at a much slower-than-expected rate of one per cent in the second quarter.
'The fact is second quarter growth was negative once again, but the decline was an awful lot slower than the previous three quarters, and raises the possibility that we could get a very strong quarter coming up,' said Joel Naroff, president of Naroff Economic Advisors.
Investors, however, chose to look at the report's negative elements, such as the still-depressed levels of consumer spending, adding to the sense that stocks are getting closer to overbought levels.
The Dow Jones Industrial Average did manage to pick up 17.15 points, or 0.2 per cent, to close at 9,171.61. The Standard & Poor's 500 was barely up, by 0.73 points, or 0.07 per cent, to 987.48. The Nasdaq Composite ended the week at 1,978.5, slipping 5.8 points, or 0.29 per cent.
For the week, the blue chip index posted a 0.9 per cent gain, pushing its monthly advance for July to 8.6 per cent, its best performance in nearly seven years. The S&P 500 moved ahead 0.8 per cent last week, giving it a 7.4 per cent gain for July, while the tech-heavy Nasdaq posted 0.6 per cent advance for the week, and 7.8 per cent on the month.
On a more humbling note, a look back into the rear view mirror shows that a year ago, the Dow closed the end of July with a 51 point drop to close at 11,326. Just two thousand or so points to go.
The 89 S&P 500 companies and three Dow 30 components expected to announce earnings results this week won't be offering up outlooks that will get the market back up to those levels anytime soon, but they might just be able to help stocks sustain the rally for another week.
The earnings calendar is low on bellwether companies, but has more than enough big names to contribute to the sense that companies are poised to reverse their losing ways by the end of the year.
Wednesday brings the week's biggest names, with Procter and Gamble, Cisco, and Newscorp releasing their numbers, along with Axa, Baker Hughes, Allstate, and Prudential. On Thursday, it's Comcast's turn, with Nasdaq, Sirius XM, Thomson Reuters, Unilever, and CBS due up as well.
Things quiet down on Friday, when Liberty Media and Edison International announce their quarterly numbers and outlooks.
It is the economy, however, that's likely to rivet Wall Street's attention and move the markets this week. Investors will be looking toward the July employment report on Friday as the headline data, but today brings car sales for July, as well as construction spending and the ISM index of manufacturing activity.
Tomorrow brings the Commerce Department's personal income and spending report for June and pending home sales.
The ADP employment report, which many on Wall Street will take as a cue for Friday's jobs report, is due out on Wednesday, along with the ISM non-manufacturing survey, and factory orders.
'We have an awful lot going on this week, and I'm expecting some volatile action as everyone chooses sides leading up to Friday's employment report. If the rally's going to continue, the data will need to be pretty conclusive,' Mr Pearl said.
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